Hurry Up and Kuwait

I have been watching the price of oil creep back up toward $70 per barrel
from its anticlimactic drop after Hurricane Katrina disrupted oil
operations in the Gulf of Mexico. Prices fell as the US and Europe
released oil from their strategic reserves to help make up the
shortfall.

Today, those reserves are depleted and prices are creeping back up
despite our unseasonably warm winter, which has reduced demand for
heating oil and allowed cars to run much more efficiently than they
would during the bitter cold that usually accompanies this time of
year.

With the ugly war of words between Iran and the United States over
Iran's nuclear energy program (which, by the way, is in full compliance
with the Non-Proliferation Treaty), investors worry a diplomatic or
military escalation will provoke Iran to halt its oil production.

Unlike, say, the first Gulf War, when Saudi Arabia was able to step
up production to replace Iraq's lost output, the world's oil producers
are already running full-bore today. There is no spare capacity left in
the oil production industry.

If Iran cuts off all, or even some, of its 2.5 million barrels a day,
the rest of the world will not be able to make up the shortfall and oil
importing countries have already dipped heavily into their strategic
reserves. Most analysts agree oil will spike over $100 a barrel,
shocking the global economy.

In the middle of this instability drops another whopper: Kuwait's
official oil reserve, at 99 billion barrels or 10 percent of the global
total, is about 51 billion barrels higher than its own internal records
show.

The correct number was recently reported in the industry newsletter Petroleum
Intelligence Weekly, based on leaked Kuwait Oil Company data.

That 51 billion barrels is more than the oil remaining in the United
States and the North Sea combined. The earth's official oil reserve just
fell by about five percent.

In a sane world, the fact that Kuwait has been lying about its oil
reserves would surprise no one. In fact, it is surprising no one today -
but mainly because no one is hearing about it. I searched the
Toronto Star, Globe and Mail, National
Post, and Hamilton Spectator in vain, even though
most reported the recent death of Kuwait's Emir.

In fact, the news does show up in the Toronto Star,
albeit in a letter to the editor complaining that a previous article on
jittery oil futures neglected to mention the peak oil hypothesis.

The global economy survived $65 a barrel oil, surprising many
analysts. However, eventually the logic of cheap energy will catch up
with us. Ultimately, cheap oil is a prerequisite to participation in the
economy. It's more or less necessary to own a car if you want to own a
house, get to work, get to school, get to the store, meet other people,
and so on, in most of our built environment.

The market cannot magically transform millions of hectares of
existing sprawl into compact, mixed use development; if that's even
possible, it will cost hundreds of billions of dollars, take decades to
complete, and require massive changes in how the government
regulates/participates in building and transportation markets.

To understand the economic implications, understand that our economy
is hard-wired for growth, and growth is tied directly to increasing
energy consumption. We don't have to run out of oil to bring about a
crisis: all we have to do is stop growing. An economic recession is
defined as two consecutive quarters in which the GDP is lower than the
previous quarter.

To the extent that economic growth depends on growth in the oil
supply, we can expect recessions every year until the economy figures
out how to function without being dependent on oil.

According to a report Robert Hirsch produced for
the US Department of Defense in February 2005, it will take two decades
of accelerated effort to convert the US economy to a post-peak system.
In Hirsch's
words:

Without timely mitigation, world supply/demand balance will
be achieved through massive demand destruction (shortages), accompanied
by huge oil price increases, both of which would create a long period of
significant economic hardship worldwide.

Translation: during the crisis of transition, millions of people will
simply be priced right out of the economy, because they won't be able to
afford to drive.

When a recession lasts for 20 years, it's called a depression. That's
what we're in for once oil production goes into decline.

Ryan McGreal, the editor of Raise the Hammer, lives in Hamilton with his family and works as a programmer, writer and consultant. Ryan volunteers with Hamilton Light Rail, a citizen group dedicated to bringing light rail transit to Hamilton. Ryan writes a city affairs column in Hamilton Magazine, and several of his articles have been published in the Hamilton Spectator. He also maintains a personal website, has been known to share passing thoughts on Twitter and Facebook, and posts the occasional cat photo on Instagram.